FINRA's BrokerCheck

Market Outlook - February 2014

Economic

A new round of budget battles will beset the U.S. House and Senate on February 27. As in the past, a compromise will most likely be reached, but spending cuts may be temporarily approved as a condition to raise the debt ceiling. Short-term maneuvering by the U.S. Treasury and a $50 billion cash cushion may push back a resolution into March.

The U.S. deficit will most likely contract to near $500 billion in 2014 from $680 billion in 2013. The decline will come from higher tax receipts, lower government spending (down 11 percent in the fourth quarter) and a gradual improvement in U.S. gross domestic product (GDP) (may increase to 3 percent in 2014). This may reverse in 2015, however, as employment remains stubbornly weak and new healthcare policy costs are introduced, which will increase government expenditures.

The U.S. jobless rate declined to 6.6 percent, continuing the steady improvement that started in 2011. The participation rate (those that are counted in the workforce or looking for work) remains at an all-time low, and new information points to another problem – low wage growth. From 2012 to 2013, wage growth was stuck at a rate of 1.9 percent, which is very similar to the rate of inflation. Productivity and outsourcing have held down increases, which has led to improved producer profits. A lack of raises and bonuses, however, can restrict meaningful increases in consumer spending.

Weaker currency values from developing markets are forcing central banks to raise interest rates. Turkey was the latest, increasing short-term rates from 7.75 percent to 12 percent, following a rate move higher in India. Despite the attractive yields, expected declines in currency values offset the higher coupon rates.

China's official reports indicate the economy is slowing, as wages increase and certain commodity prices rise. Growth rates, which have been as high as 10 percent, are now 7.5 percent, and revisions or actual (non-government) data may be even lower. Bank and corporate defaults may rise, which could derail exports and possibly increase cost of goods for developed market importers.

Equity

Stocks fell sharply in January, with the Dow Jones Industrial Average having its largest monthly decline in nearly two years. Fear of continued weakness in emerging markets was the largest contributing factor to the downturn in equities. These fears were exacerbated by lower than anticipated activity in the Chinese manufacturing sector, as well as worries of capital flight from emerging market economies. Small and mid-cap indices fell less that the large-caps, largely as a result of less exposure to foreign markets.

Alternatives

U.S. Real Estate Investment Trust (REIT) returns rose in January, outperforming the wider equity markets. Top preforming sectors included manufactured homes and free-standing retail, which both delivered 8.61 percent in total returns. Within the commodities complex, timber
was the only sector with a negative return in January, returning -4.14 percent.

Fixed Income

Interest rates have fallen from near 3 percent (U.S. Treasury 10-year) in January to 2.72 percent as a weak jobless report indicates the economy may require a few more quarters of stimulus and Fed bond purchases. Low inflation indicates rates may be range-bound for some time.

Corporate bond spreads remain attractive, especially with lower Treasury yields, reduced corporate bond issuance and better than average profitability from large U.S. and International issuers. "A" rated bonds are trading at a spread of 60 to 70 bps (0.60 percent to 0.70 percent), which adds considerable income opportunity vs. Treasuries.

International and emerging market debt (in local currency) has under-performed, as the U.S. dollar continues to rise. Attractive coupons and improving ratings may reverse this trend in the next few quarters, especially with stability or improvement in energy-related
commodities.

***

 

Disclosures
Sources: Bloomberg; Econoday, Inc., DWS Investments, PIMCO, Blackrock, Bespoke Investments, Zack's, Wells Fargo

Securities offered through Royal Alliance Associates, member FINRA/SIPC. Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor not affiliated with Royal Alliance Associates.

Investing involves risks in regards to all of the investment products and strategies referenced here including the potential loss of principal. Past performance is not a guarantee of future results. Indexes cannot be invested in directly, are unmanaged and do not incur management fees, costs and expenses.

In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

The price of commodities, such as gold and currency, is subject to substantial price fluctuations of short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities and currency is widely unregulated and
concentrated investing may lead to higher price volatility. Foreign currency trading carries a high level of risk and can result in loss of part or all of
your investment.

High yield bonds carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal.

This material contains forward looking statements and projections. There are no guarantees that these results will be achieved.

International investing involves special risks including greater economic and political instability, as well as currency fluctuation risks, which may be even greater in emerging markets. These risks can be accentuated in emerging markets.

Investors should understand that investing in strategies that are non-correlated to the stock and bond markets are not without risk. There can be no assurance that alternative investments will be profitable and will even outperform asset classes correlated to the stock and bond markets.

Investments in real estate have various risks including possible lack of liquidity and devaluation based on adverse economic and regulatory changes.

Rehmann Financial charges an ongoing management fee to investors who choose to invest in this strategy. The impact of fees will affect overall account returns.

No investment strategy, including diversification can guarantee a profit or protect against loss in periods of
declining values.

Securities offered through Royal Alliance Associates, member FINRA/SIPC. Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor not affiliated with Royal Alliance Associates. 

Please contact the firm about fees and to receive a copy of the Form ADV. Rehmann Financial 4086 Legacy Parkway, Lansing, MI 48911, (517) 316-2400.

Published in Wealth Management

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